Bad HR Can Cost You Billions, Just Ask Boeing – Why HR Needs To Embrace Risk Management

Boeing is suffering an estimated $45 billion loss from a single employee error. So, add reducing errors to HR’s responsibilities, or this could happen to you.

A Think Piece – Urging HR to develop a risk management process that focuses on reducing employee errors.

Before you assume that employee errors are an insignificant corporate cost factor.
Realize that as a result of the recent “missing door” error.
Boeing has already lost an astonishing $35 billion in market cap value.
And that loss is just the beginning of the costs they will never recoup.

Begin By Realizing… That This Boeing Economic Catastrophe Was Caused By Just One Employee Error

Many might automatically assume that the cause of the “lost door incident” on a Boeing 737 Max was a design or mechanical failure. However, the. NTSB’s preliminary report found that actual cause of this failure was a single employee/team error. A human omission occurred after some repair work was done to the already manufactured fuselage at the Boeing factory. The error occurred when employees on the repair team simply forgot to reinstall the 4 required door sealing bolts that were initially installed on the door. 

How Can The Cost Of A Simple Employee Error Reach Into The Billions

One of the early steps in your error reduction effort should be working with the CFO’s office to calculate the potential economic damage from each possible employee error. I estimate that the total Boeing losses over the next two years will reach up to $45 billion because of this missing door incident.

The largest cost areas will be in stock price losses ($35 billion) and decreased yearly revenue ($7.8 billion). I conservatively estimate that the rest of the remaining losses will be at least $2 billion. If you’re curious about where the losses are occurring. Note that the losses in this Boeing case can be assigned to 10 different cost categories. In this list, the categories with the highest economic impact appear first.

  • Lost shareholder value – between January 1 and March 1, 2024, Boeing’s stock dropped by approximately 18%, resulting in an indisputable $35 billion shareholder loss in market cap value. Clearly, stock traders have already reduced this company’s value due to this single no-fatality incident.
  • Lost revenue – because of this incident. I estimate that Boeing’s $78 billion annual revenue may go down as much as 10% ($7.8 billion estimate) because they will sell fewer planes. And the ones they sell will have to be sold at a lower price. 
  • The loss of airline customers – Boeing may also permanently lose some of its existing and potential customers ($2 billion estimate). And to make matters worse, those lost sales will strengthen their competitor, Airbus.
  • Airline lawsuits – Boeing may have to reimburse its airline customers for the lost income during the months when restrictions prevented their 737s from flying. They may also sue for their current 737’s reduced resale value. Airline customers may also expect compensation for missed delivery deadlines and for the fact that some of their passengers will refuse to fly on the 737. Estimated costs: $1 billion
  • Added manufacturing costs – the plane itself and the manufacturing and inspection processes must be analyzed and redesigned. This manufacturing delay will further lengthen the backlog of already-ordered planes. The cost of fixing already in-service planes will also be significant.
  • Legal costs – passenger lawsuits’ legal and settlement costs will be significant. The cost of responding to regulatory investigations by the NTSB and the Justice Department must also be included.
  • Outsourcing may have to be reeled in – because avoiding future manufacturing errors requires more control. Their outsourced fuselage manufacturer, Spirit, may have to be purchased (talks are already underway).
  • People management costs – manufacturing employees must participate in updated error avoidance training. This incident will also increase employee turnover costs as the best current employees seek an employer with a better reputation. A weakened employer brand image will also make recruiting experienced employees more difficult and expensive. Future labor costs will likely go up significantly because Boeing’s union workers already demand a 40% raise. Also, because robots make fewer errors than humans, the currently mostly manual manufacturing and assembly processes may have to be supplemented with expensive robots. Finally, each HR process will have to be revised. So that each one clearly has an impact on reducing catastrophic error rates.
  • A weakened corporate culture – Boeing is already paying the price for its past layoffs and excessive early retirements. That resulted in the loss of many experienced employees. That made a major contribution to “their culture of safety,” with abundant tribal knowledge around safety.
  • Other additional costs – Boeing’s insurance rates will likely skyrocket over the next few years. 

Note: If you find that the $45 billion cost estimate for this simple error is high, imagine what the cost would be if the Alaskan airline plane had crashed and 150 passengers were killed! 

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Next, Realize That HR Can’t Reach Its Workforce Productivity Goal… Until It Acts To Reduce Workforce Errors

The primary goal of every HR function should be to increase “workforce productivity” (i.e., output value versus labor cost). However, HR will never be successful at increasing employee productivity until its leaders realize it won’t be able to maximize it when HR is still experiencing the “drag” of costly team and employee errors. And the fact that a single employee error costs Boeing billions should serve as a wake-up call to every executive and HR leader. Alerting them to the fact that every organization needs a data-driven risk management effort that proactively reduces all workforce risks, including employee errors. 

So, as an integral part of HR’s workforce productivity effort, it must develop a formal Risk Management (RM) effort. If you’re not familiar with the concept. HR risk management is a two-element process. The first element tries to minimize workforce errors. The second element strives to minimize people management risks (like keeping toxic employees and early new-hire turnover). The main part of this article will focus on the first element of risk management, which tries to proactively reduce expensive employee errors.

The First Step In Reducing Errors… Is Prioritizing The Most Impactful Ones

Because “the dollar consequence of each error is not equal. HR must first prioritize the errors that it is trying to reduce. So that it can focus on the most expensive errors that have a high probability of occurring. The steps in error prioritization include

  • Identifying and making a complete list of all common workforce errors. 
  • Estimating the likely cost for each major workforce error (i.e., the consequence of an error). 
  • Next, a numerical probability is assigned to each, covering its likelihood of occurrence. 
  • Next, prioritizing each error (based on a combination of its probability of occurring and its costs)
  • Finally, HR must develop an approach for identifying the most effective people management actions that can reduce the highest priority errors.

The Next Step Is … To Identify Ways That HR Can Influence The Reduction Of Error Rates

Along with developing a risk management mitigation capability, an essential part of HR’s productivity effort must include reducing the occurrence of high-impact employee errors. The primary action area usually involves tweaking standard HR processes (i.e., recruiting, retention, rewards, etc.). So that each major HR process now has a feature that proactively serves to reduce errors. That feature should also influence employee attitudes, values, and behaviors toward each high-priority error. Here is an example of how the design of an HR process can influence error rates.

Example: An HR process influences error rates – the performance management/appraisal process contributes to reducing employee errors, making the percentage and the cost of each employee’s errors a standard assessment area because the presence of this appraisal element will likely get both the employee and their manager to focus on error reduction continually. 

HR/people management processes with the highest impact on employee error rates are listed below.

  • The employee retention process – One expert concluded that the bolt error was the primary cause because Boeing had lost many experienced employees who insisted on error-free work. Unfortunately, the new replacement workers didn’t consider error-free work nearly as important. So, the retention process can significantly impact reducing errors when it makes the employees with the lowest error rates and the highest work quality their primary retention targets. 
  • Compensation, recognition, and reward functions – rewards can significantly impact reducing errors. So make sure that recognition, compensation, and promotion processes directly and handsomely recognize and reward low error rates.
  • Performance management processes – these processes can have a significant impact on reducing errors if you include work quality measures and error rates in every employee/manager assessment. The process should also include proven approaches to turn in employees’ error records around. 
  • The recruiting process – if you do a great deal of hiring, it can lower error rates. When it makes, quality work and a history of low error rates primary selection criteria for all technical jobs. Recruiting should also target more experienced workers because they are likelier to have error avoidance and safety deeply ingrained in their values. An interview question might also be added to ask each candidate how they would reduce errors in their new job.
  • The available training – the proper training is proven to have a measurable impact on an employee’s error rates. So make sure that the fission error reduction training is available to all. And track the effectiveness of the training to ensure that those who complete the training on quality/error-free work experience a measurable drop in error rates. Part of that training should educate employees on the importance of minimizing/eliminating work errors. 
  • Six Sigma processes – because some organizations still expect Six Sigma measurement in every department. It makes sense for HR to utilize these existing Six Sigma reports. To identify teams and employees that need error reduction help in the form of mentors and training. 
  • Metrics reporting – Ensure that HR reports employee error and work quality rates widely because internal competition will likely help lower errors.

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The Final Error Reduction Step Should… HR Accepting Accountability For Reducing Errors

Accepting full accountability for problem areas is a big part of defining a strategic leader. So, HR leaders should assume that their executives are not stupid. Instead, because you “have a seat at the table.” They automatically expect you to step up and accept ownership and accountability for things that can go terribly wrong for two basic reasons.

First, because especially during tough times. No one likes whiners, excuse-makers, or those who try to shift the blame. Those behaviors are a major distraction that prevents everyone from moving on toward finding a solution. The second reason is that you can’t expect to get the praise, rewards, and extra funding that will accompany success in your accountability area unless you first clearly accept the ownership of problems in your area. So why not openly welcome this opportunity to be held accountable for reducing errors? Because that will make you a bright, shining light in a sea of Buck shifting. Note: If you want to learn more details about why HR must accept accountability, you can find it here.

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In Addition To Minimizing Errors… HR Must Also Mitigate People Management Risks

Remember that there are two elements to risk management. We have already thoroughly covered the first element (error reduction). So now it’s time to shift the second element of risk management throughout the people management area. However, before focusing on risk management, you should realize the differences between reducing errors and managing risks. As we have already learned, error reduction focuses on reducing errors in the work of individual employees and teams. In contrast, people management risks are “future occurrences” that must be prevented or mitigated. If they were to happen, they would have a negative effect on the results of your HR processes, such as hiring and retention. 

The most common and expensive risks that need to be managed include hiring a poor-performing employee, a key employee leaving to a competitor, keeping a toxic employee, preventing sexual harassment, and allowing an employee in a critical job to have a high error rate. These future risks can be predicted, prepared for, and minimized through HR actions. And in many cases, their impacts can be mitigated (reduced). Or their costs can be offset through insurance.

Example: HR reduces risks – a major risk factor is when recent new hires depart during the first months of their tenure. This risk can be reduced if you add an element to your hiring process dedicated to assessing the likelihood that an individual candidate will likely become an early turnover. This early departure can be defined as a risk that should be prevented. The damage that early departures cause. This includes the fact that all of their initial training will be wasted. The fact is that the work of the departed new hire will have to be done by others. Finally, these departures will once again unnecessarily incur recruiting expenses and take up a great deal of a hiring manager’s time. 

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Final Thoughts

I would note that if the Boeing employee error example I’ve highlighted here isn’t enough to get your attention, It’s also important to remember that in addition to this year’s “missing door” incident. Two Boeing 737 Max airplanes recently experienced two deadly crashes with hundreds of fatalities. And those “errors” will be even more expensive than the current door incident. And if you need another glaring example of a company suffering from excessive errors. Consider the pain the Norfolk Southern Railroad faces due to its multiple derailments during the last year. So, the lesson to be learned is that it’s time for HR to expand its impact by embracing risk management and error reduction.

Author’s Note

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About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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